Economic Fundamentals - Economic growth reflected by GDP growth rate influences currency demand and exchange rates, with stable growth attracting international capital and pushing exchange rates up, while slow growth or recession exerts depreciation pressure [1] - Inflation rates affect purchasing power; higher inflation compared to other countries leads to decreased confidence in the currency, resulting in downward pressure on exchange rates [1] - Interest rates are closely linked to exchange rates; higher interest rates attract capital inflow, increasing currency demand and supporting exchange rate appreciation, while lower rates can lead to capital outflow and suppress exchange rate performance [1] Monetary Policy - Central banks use monetary policy as a tool to regulate exchange rates, with the direction and intensity of policy having a direct impact [1] - The revised Foreign Exchange Management Regulations in 2025 enhance the macro-prudential management system, allowing the central bank to stabilize exchange rates through foreign exchange reserves and market operations [1] - Tight monetary policy can enhance currency attractiveness and promote appreciation, while loose policy increases money supply and lowers interest rates, leading to depreciation expectations [1] International Balance of Payments - The balance of payments, particularly the current account, reflects a country's external economic balance; a persistent surplus indicates higher demand for the currency, leading to a strong exchange rate, while a deficit exerts depreciation pressure [2] - Capital and financial accounts show cross-border capital flows; sustained net inflows increase demand for the currency, supporting exchange rate strength, while outflows create pressure [2] Geopolitical Factors - Geopolitical stability is crucial for attracting international capital; political turmoil or increased policy uncertainty can lead to capital outflow and currency depreciation [2] - Sudden events like geopolitical conflicts or natural disasters can trigger market risk aversion, causing investors to shift to traditional safe-haven currencies, leading to short-term appreciation of those currencies and depreciation of affected currencies [2] Market Sentiment and Speculation - Market sentiment and speculative behavior significantly influence short-term exchange rate fluctuations; expectations of currency appreciation can lead to buying pressure, while depreciation expectations can trigger sell-offs [2] - Large-scale speculative trading can amplify short-term volatility, especially in high liquidity conditions [2]